How private equity might work

How private equity might work

Ewen McKenzie | April 26, 2008

Rugby's push for private investment is a logical step for the game and one that I applaud, but the devil, as always, is in the detail.

If we were to take the business of the Waratahs, as distinct from New South Wales Rugby Union, there is no doubt that it is a very good business. Money in versus money out would see a healthy balance sheet that would attract the most conservative entrepreneur.

The Waratahs as an entity trade well year in and year out. If you can keep your crowd numbers up and winning percentage strong then sponsorship follows. Measure this against the Roosters or Swans and the commercial dynamics, while similar, are actually halved because the season is as only half that of our competitors.

A longer home-and-away format for the Super 14 would only improve the finances because the costs of running the business don't increase by much at all. The base expense for players would remain similar, only the volume of match payments would increase with some extra players required to ensure squads could survive the longer program.

As it stands a purely provincial player in Australia would play 12 plus super games and a professional player in Japan is about the same. In Europe a professional player will play 30 plus and in South Africa and New Zealand 22 and up.

The opportunity to have investment in the professional rugby teams has the upside of injecting money into the game. There are a few legitimate questions as to how this might work. As an investor, unless there is a philanthropic motivation, there will be an entitlement to expect some type of return.

The percentage of control is then the next question. Does the private equity partner have control? I suspect not so best case 49% of ownership might be possible but this might be a little on the high side.

If the equity contributor (partner might be an over statement) does not have control then there is the question of whether they get to be at least involved in how the money gets spent.

In other words is the governance structure set up to handle this arrangement? In the Brumbies case yes. They already have a Brumbies board that looks solely after the interests of the professional rugby team. The distribution of some of those board seats to the equity contributors would seem manageable and logical. It might not mean control but at least a significant voice.

NSW does not have the same structure and would probably need to find a different way of governance to make private equity work.

This will be an interesting situation because the current board comprises of independent directors who have a leaning towards the professional elements of the business and other representatives who have jurisdictions and responsibilities from other parts of rugby including country, juniors, suburban and the premiership. All significant in their own right but specifically focussed.

Adding equity board members into this would become cumbersome and therefore alternative governance would need to be considered. This will not be easy.

My take on the idea is that the 49% will not actually be the difficult part provided there are seats at the board table. The real elephant in the room is who owns and controls the other 51%?

I am sure in the NSW context it will be the NSWRU. Conflicts of interest should be avoided at all costs.

Soccer's A-League teams have a variety of investment models but I think rugby is a long way from being owned by a Hollywood star or Russian billionaire.

Whatever the arrangement, the top end must continue to feed back to the game's grassroots otherwise the financial boom will be short-lived indeed.